Using own state's 529 plan is fine



Dear Joe, I reside and pay taxes in Mississippi. My granddaughter lives with her parents, who reside and pay taxes in Georgia. Can I own and contribute to a 529 plan in Mississippi (Mississippi Affordable College Savings Plan) and have my granddaughter as the beneficiary? Will qualified withdrawals for her college education expenses be taxable to her? Thank you, -- Wix Crawford


Dear Wix,

You should feel free to open your 529 account with Mississippi's 529 plan since your granddaughter's residence in Georgia makes little, if any, difference in the tax treatment of the account. Qualified withdrawals to pay for college will be tax-free for federal, Mississippi and Georgia purposes.

In fact, you gain an extra tax break by using the Mississippi 529 plan because Mississippi provides a state income tax deduction of up to $20,000 per year for a married couple making contributions to the in-state 529 plan.

You cannot claim the Mississippi deduction on contributions to Georgia's or another state's 529 plan.

In relatively few situations, opening an account in the state where the beneficiary lives provides a special benefit. An example of one of these states is Virginia, where a "scholarship withdrawal" to a Virginia beneficiary from a Virginia 529 plan is exempt from state income tax, but a scholarship withdrawal from another state's 529 plan is not exempt. Ohio has a similar rule.

A scholarship withdrawal is a nonqualified distribution requested after the beneficiary receives a tax-free scholarship. For federal purposes, the earnings portion of the distribution is taxable, although the usual 10-percent penalty is waived.

Some other states offer scholarships, fee reductions or other benefits for resident beneficiaries in the in-state 529 plan. It would make sense for anyone contributing for a beneficiary who lives in a different state to investigate whether there is reason to consider using the 529 plan in the beneficiary's state. If there is, you should take that factor into consideration when choosing a 529 plan.

The only special break Georgia offers to resident beneficiaries in its 529 plan is an exclusion of the account value in determining eligibility for any of Georgia's state-administered financial aid programs. Because grandparent-owned accounts generally are excluded anyway, that should not be a factor in your decision.